Competition and cooperation between rival firms

Abstract

This dissertation studies the market effects of competition and cooperation between otherwise noncooperative firms. The first two chapters present theoretical treatments of joint ventures and mergers, respectively, while the third chapter applies sophisticated econometric techniques to market data generated in controlled experiments. A common thread ties the theoretical chapters: cooperation can be socially beneficial under some fairly general conditions. These conditions are derived and elucidated in each chapter. Despite potential social gains from combinations of otherwise competitive firms, consumers may nevertheless experience increasing prices. The goal of antitrust regulation is to ensure the competitive operation of markets, for the sake of consumers as well as non-combining competitors. The ensuing tension between social efficiency and higher post-combination prices is studied in detail in both of the first two chapters. In the case of a production joint venture, it is shown that relationships which are closer than "arm's length" can be socially optimal, although antitrust regulation clearly discourages such relationships. In the case of mergers, it is shown that combinations of large firms can not only increase aggregate welfare, but may increase consumer welfare under entirely plausible conditions. These results support a broad, rule-of-reason approach to interrival cooperation. The third chapter studies the tendency of non-cooperating, financially motivated subjects in controlled experiments to play as though they observe a particular adjustment process. There have been many experimental and field studies of the Cournot model, but the process of adjustment to equilibrium predictions has not been a major focus. Studying the observed play of experimental subjects in the Cournot environment is important because it can allow for greater understanding of where the model's assumptions fail in the field. Understanding adjustment can require some relatively advanced econometric tools, which are discussed and employed in the third chapter. It is shown that subjects do not individually conform to theoretical adjustment predictions, but behavior at the market level does approach predictions fairly often.